This Just In: More Upgrades and Downgrades

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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

Today, we're going to tackle a series of bullish tech moves on Wall Street: new buy ratings at Microsoft (NAS: MSFT) and Oracle (NAS: ORCL) , and an improved price target for LinkedIn (NAS: LNKD) .


A Windows of opportunity
First up, Stifel Nicolaus came roaring back into the tech sector this morning. Combining coverage resumptions with new ratings on nearly a dozen firms, running nearly all the way from A to Z -- Ariba to Ultimate Software -- Stifel's getting the most attention for its advice to buy two tech stalwarts: Microsoft and Oracle. Let's take these one at a time.

Microsoft, according to Stifel, is likely to gain as much as 20% over the course of the year as it rises to a target price of $38. Stifel says that with Windows 8, Windows 8 Server, and Office 12 all on deck, Mr. Softy is entering into "one of the most promising product cycles in its history." Microsoft is also making repeated efforts to remain relevant in a mobile world through its alliances with Nokia (NYS: NOK) on smartphones, and more recently Barnes & Noble (NYS: BKS) on tablets.

Despite the company's modest growth rate (8%), Microsoft's share price at just 11.5 times trailing earnings, its price-to-free cash flow ratio lower than that, and its enterprise value-to-free cash flow ratio even lower than that all make the value-investor's case for Microsoft pretty self-evident. Add in a modest 2.5% dividend to hedge your bets if all doesn't work out as planned, and Microsoft looks to be one of the safer tech investments around. (And a cheap way to bet on turnarounds at Nokia and B&N, to boot.)

Don't fear the Oracle
Stifel's case in favor of Oracle is a bit tougher to make. At 15 times earnings, the stock's no obvious bargain relative to its sub-12% growth rate, and Oracle's 0.8% dividend yield is positively stingy.

Still, a savvy investor can still find value in Oracle. The company generates $13 billion in annual free cash flow, versus the mere $9.7 billion in profits claimed on its income statement. That means the stock is arguably a full third cheaper than it looks -- about a 10 times multiple for EV/FCF -- which seems cheap enough even given the modest growth rate and negligible dividend yield. I don't think the case for value here is nearly as strong as at Microsoft. Nonetheless, Stifel's right about this stock, too. Oracle's undervalued.

On the other hand...
And then there's LinkedIn. To its credit, Stifel Nicolaus is not the analyst recommending this one. The people hiking the price target at LinkedIn today hail from Canuck stock shop Canaccord Genuity. Impressed with the company's "strong Q1" results, reported yesterday, Canaccord this morning reiterated its buy rating on the stock and upped its price target a whopping 42%, to $135 per share. But the real story here is the why: Canaccord predicts we will see "higher advertising and subscription revenue" at LinkedIn this year, valuing the company at "50x our 2016 EPS estimate of $4.55."

Yes, you read that right. Canaccord thinks you should pay 50 times what LinkedIn might earn... four years from now. Is that reasonable? Is that... sane?

According to Yahoo! Finance, most analysts see LinkedIn growing earnings at 69% annualized over the next five years. Crazy as that sounds, though, Canaccord says LinkedIn is in the "early phase of a hard-to-stop penetration curve, lending high confidence to continued growth expectations." Personally, I'm not confident about what any stock will do over the course of the next five years, and when I look at the 999 P/E that Yahoo! Finance currently ascribes to LinkedIn, I see the Ghost of Dot-Com Bubbles Past, and shudder.

Even valued on its free cash flow, which is superior to reported net income, LinkedIn looks dreadfully overpriced. While it's possible that everything will go right for this company and Canaccord will eventually be proven right to recommend it, I still think there are safer ways to profit from the new technology revolution.

Whose advice should you take -- mine, or that of "professional" analysts like Stifel Nicolaus and Canaccord Genuity?Check out my track record on Motley Fool CAPS, andcompare it to theirs. Decide for yourself whom to believe.

At the time this article was published Fool contributorRich Smithowns shares of Nokia.He also has public recommendations available on more than 60 separate companies (including, on occasion, LinkedIn). Check them out on Motley Fool CAPS, where he goes by the handle "TMFDitty" -- and iscurrently ranked No. 350 out of more than 180,000 CAPS members. The Motley Foolhas adisclosure policy.The Motley Fool owns shares of Microsoft, Oracle, and LinkedIn.Motley Fool newsletter serviceshave recommended buying shares of Microsoft, LinkedIn, and Nokia.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Microsoft and writing puts on Barnes & Noble.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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